The inflation based on consumer price index (CPI) for January 2022 increased to 6.01 percent from the 5.66 percent reported for December 2021. This was 4.06 percent in January 2021. The CPI inflation has crossed the RBI’s target rate of 4 percent with a +/- 2 percent range.
Inflation has emerged as a prominent risk in major economies, particularly in US and European economies, over the last six months. The European Central Bank (ECB) – central bank of European Union (EU) – has an inflation target rate of 2 percent in the medium term. This target rate was breached in July 2021 and inflation rate has been inching higher since then, and the Eurozone inflation rate for January 2022 is 5.10 percent.
The inflation situation in the US is similar. The inflation target rate of Federal Reserve – the central bank of US – is 2 percent, which was breached in March 2021. Inflation in US has been steadily rising since then, and stands at 7.50 percent in January 2022, the highest level in four decades.
This trend of high and rising inflation is not confined to the US and EU. The inflation rate in January 2022 for UK, Germany, and Canada were 5.40 percent, 4.90 percent, and 4.80 percent, respectively. The developing countries, too, face the problem of high inflation. The latest inflation rate in Brazil, Mexico, Russia, and South Africa were 10.38 percent, 7.07 percent, 8.73 percent, and 5.90 percent, respectively.
India has been staying insulated from the inflation risk, so far. The CPI inflation crossed the 6 percent mark in May and June 2021, but cooled afterwards, and finally bottomed at 4.35 percent in September 2021. It has been rising steadily since then but has remained within the RBI’s target range. But in January 2022, with the inflation based on CPI crossing 6 percent, India too has now joined the high inflation club.
The RBI prioritized growth over inflation by deciding to keep interest rates unchanged and maintain its policy stance ‘accommodative’ in its monetary policy committee (MPC) meeting concluded on 10 February 2022.
The RBI governor’s statement from the meeting shows the RBI to be quite optimistic on the inflation front. They expect softening food prices, waning of Omicron risk, and moderation of supply chain pressures to soften core inflation. According to RBI, the increasing crude oil prices is the only major upside risk to inflation. RBI retains its inflation projection for 2021-22 at 5.3 percent, and CPI inflation for 2022-23 is projected at 4.5 percent.
When asked about the inflation risk, after the January 2022 figures were out, this is what RBI governor said, “as far as India is concerned, the momentum of inflation since last October has been on a downward slope. It’s primarily the statistical reasons, the base effect which is leading to higher inflation especially in the third quarter, and the same base effect will play in different ways in the coming months. Our inflation projections are quite robust. We stand by our inflation projections.”
There are risks in placing full trust in such statements coming from higher authorities or institutions. When inflation first crossed 2 percent in the first half of 2021, the Federal Reserve authorities said it to be just transitory caused by the faster reopening of the US economy and the resulting bottlenecks and supply chain disruptions. But when the high inflation persisted, they maintained it to be transitory, but added that it is persisting longer than they expected. Now, after more than nine months of higher inflation, they are planning to raise interest rates soon-than-previously planned, and at a faster rate.
Time will show how things will pan out in the future, but what we know for sure is that high inflation is not good for the economy, companies, and markets. Stock markets have underperformed during periods of high inflation, historically. Corporate earnings, too, suffer during periods of high inflation. The adverse effect of inflation is severe on those people in the lower end of economic spectrum, in terms of income and wealth.
It is important to properly assess the risk of high inflation. The negative consequences of high inflation on economy, corporate earnings, and markets may get exacerbated if we underestimate it.
What is relieving about India’s CPI inflation is that it has declined on a month-on-month basis.
AMN CAPITAL 